Rent control: What investors need to know [2019 edition]

rent control in the US — what investors need to know
by Team Stessa, posted in Newsletter

Rent control is an important topic for landlords. Does it work? Does it help vulnerable tenants? Does it exacerbate housing shortages? How does it affect our businesses? The academic debates are ongoing—for, against, against, against, against. Even at the Federal level, Democratic presidential candidate Bernie Sanders is proposing a nationwide rent regulation strategy at a cost of $2.5 trillion.

In February, Oregon passed its statewide cap on rents. Earlier this summer, Elliot Njus of The Oregonian reported that according to a Portland State University report, the rent cap is already ineffective. In June, New York state also passed its own stricter rent control restrictions.

Now, California is the latest state to join the rent control club, with Christian Britschgi of Reason reporting that lawmakers approved AB 1482, “which caps rent increases at 5 percent per year plus inflation, and prevents landlords from evicting tenants without citing a government-approved reason.”

Conor Dougherty and Luis Ferré-Sadurní of The New York Times (subscription required) report that this bill will affect approximately 8 million rental units in the state, and was heavily pushed by tenants’ rights groups. Dougherty and Ferré-Sadurní also report that “Moves to expand rent control through ballot initiatives or legislation have arisen since 2017 in about a dozen states, including Washington, Colorado, and Nevada.”

Rent control states across the US

Source: NYT

The consensus among many experts following California’s announcement was not positive.

Sam Hill of Newsweek reports that the rent control measures will create a new mess in California. Hill notes that rent control shrinks the rental pool, discourages landlords from improving or even maintaining the rental properties, encourages corruption, and is simply unfair to mom-and-pop real estate owners.

Forbes contributor Chuck DeVore wrote this week that “California’s new housing stock has been severely restricted by the state’s myriad web of development fees, restrictive zoning rules, environmental laws—including greenhouse gas restrictions—and lawsuits. Now it’s about to get much worse, with statewide rent control further discouraging new investment in the state.”

For an excellent look under the hood of the new rent control measures in California—and how they compare to New York—see Dennis Lynch and Georgia Kromrei’s analysis on The Real Deal.

Multifamily: Trillion dollar industry, FHFA moves

Dan Rafter of RE Journals reported this week that according to a Hoyt Advisory Services Study, “the apartment industry and renters each year contribute more than $3.4 trillion to the national economy.”

Steve Randall of Mortgage Professional America (MPA) also reported that mortgage originations and multifamily lending will reach record highs in 2019 and 2020. Randell notes that forecasts indicate that commercial and multifamily mortgage bankers will close a record $652 billion of loans in 2019, 14% more than the previous record in 2018.

Jacob Passy of MarketWatch reports that the Federal Housing Finance Agency (FHFA) “will increase caps on the amount of multifamily loans Fannie Mae and Freddie Mac can purchase next year while also closing some loopholes.”

Kathleen Howley of HousingWire notes that the FHFA “boosted the multifamily lending caps for the nation’s two largest mortgage financiers to $100 million each, but that won’t necessarily increase volume because it also ended the exemption for green loans.”

Recession fears

Recession talk is in full swing in the wake of the Fed’s announcement this morning that it will cut interest rates by another quarter point. Greg Robb of MarketWatch reports that “in a move to support the economy in a time of greater uncertainty about the outlook, the Fed reduced its benchmark short-term rate to a range between 1.75% and 2%.” And is “open to the idea of more easing.”

Meanwhile, John Aidan Byrne of The New York Post notes that analysts are warning that falling rates could be a strong recession signal. “Falling interest rates will undoubtedly squeeze interest margins, reflecting concerns among other analysts that banks may start restricting lending — and precipitate a recession — as their focus turns to riskier activities and consumer account charges.”

Don Lee of the Los Angeles Times reported that despite all the recession talk, Americans are much more prepared this time as a result of lower interest rates, increased wages, as well as tighter lending restrictions as a result of the 2008 credit crisis.

Amidst recessionary signals, Amy Dobson of Forbes reports on a new Redfin report showing the most vulnerable cities to a forthcoming recession. Loan-to-home values are the highest in the following cities: Riverside, CA, Phoenix, AZ, Miami, FL, San Diego, CA, and Providence, RI.

Meanwhile, Jacob Passy of MarketWatch covered the same Redfin report noting that Rochester, NY is the city that will be the least affected by a recession.

For worried real estate investors, Forbes Councils Member Ryan Pineda provides an excellent article specific to investors on how they can prepare themselves and their businesses for an economic pullback.